History is littered with successful partnerships, Lennon & McCartney, Anthony & Cleopatra, Bonnie & Clyde, Laurel & Hardy to name just a few.
As some professions are prevented from incorporating under Irish law, and many others don’t want to incorporate, the only option available is to go into partnership.
With all things in life there are pros and cons, but in general partnerships can be rewarding and productive. Reasons that partnerships are successful include:
Partnerships benefit from the combination of complimentary skills of two or more people. There is a wider pool of knowledge, skills and contacts.
The capacity to raise funds will be increased, both because two or more partners can provide capital and because their borrowing capacity may be greater.
If you want to expand your operations then ambitious young solicitors may be attracted to the business if they are given the incentive to become a partner. This incentive will also act as a powerful motivating tool.
They are cost-effective in comparison to working as a sole-trader. The more practitioners in the office the lower the overall overhead cost per person.
Partnerships provide moral support and will allow for more creative and innovative business solutions. #business
On the down side you have to consider issues such as an increase in your personal risk exposure and with the obligation to compromise, you won’t be in full control of all business decisions that impact on the direction of your career.
Conflict in partnerships has to be managed to avoid the Yoko effect.
It is important to ensure that if you are going into partnership, or are already in one, that the appropriate contracts and agreements are in place. If you do not have a written partnership agreement in place then the Partnership Act of 1890 will govern the relations with your partner. As you might gather from the date, it is a little antiquated for today’s businesses. For example, under the 1890 Act, there is no right to expel a partner; any partner may dissolve the partnership; if a partner dies the partnership automatically ceases and there is no right to retire under the partnership act. All these are crucial reasons to adopt a written partnership agreement.
It is not the intention of this article to cover every aspect that needs to be addressed, but I would like to highlight the following areas that raise problems frequently in practice.
Joint & Several Liability
All partners in a partnership are exposed to joint & several liability. So if Partner A takes out a business loan and runs off with the cash, Partner B is left to foot the bill. Partner B can chase Partner A for their contribution to the liability, but that’s a matter between them and the bank doesn’t care so long as it gets paid.
Joint & several liability is particularly important in relation to client accounts. Proper controls need to be in place to ensure that client funds are not misappropriated. For example, cheques should require signatures from both partners, so one cannot draw funds without the other’s knowledge. Having the proper controls in place isn’t an issue around lack of trust between partners and shouldn’t be viewed as such. It is good business practice.
When partnerships are entered into it is rare for the parties to think about the exit strategy as it often seems a long way down the line. The idea that all partners will want to retire or exit at the same time doesn’t hold water in reality.
When looking at setting up a partnership it is important to recognise an exit strategy that is agreeable to all. By way of example, if a practice has been built up it may have a commercial resale value in respect of the goodwill generated over the years.
It is only fair that the retiring partner be able to recognise their portion and benefit from the value they have contributed in promoting the name of the firm.
If it is determined at the outset how that goodwill should be valued then this will put everyone on a clear footing from the beginning and avoid contention of the valuation at retirement.
Other areas that also need to be considered include when a partner leaves the firm to go practice either on their own or with another firm and death in service which is discussed below.
The Business Premises
A property owned by two or more people can be held either as Tenants In Common or under Joint Tenancy. There is a very important distinction between the two. When an asset is held under joint tenancy then on the passing of one of the owners it automatically passes to the other(s). It does not form part of the deceased’s estate. When it is held as tenants in common then deceased’s share of the property passes into his or her estate and is distributed in accordance with their will. The default position is Joint Tenancy.
Whether the property is held under joint tenancy or as tenants in common there are issues to consider. Firstly, if the property is held under joint tenancy one partner could find themselves with a huge tax bill on the passing of the other.
If a business premises is held unencumbered and is worth say €500,000 then the surviving business partner is receiving an inheritance to the value of €250,000. If the business partners are not related the tax payable by the surviving partner will be €77,137.
If the property is held as tenants in common then the 50% share of the property will pass in line with the deceased’s will. The recipient of the deceased’s share may want to sell to realise the cash. If the surviving business partner(s) can access the funds to do this then there is no problem, but that is not always possible and can cause friction between the parties.
Planning for either eventuality is important. To this end it may be worth looking at life cover for Partner A, with the beneficiary being Partner B. The life cover should be sufficient to discharge the tax payable under joint tenancy, or buy the share of the property from the beneficiaries under tenants in common.
Death in Service
The death of one of the partners can have serious financial consequences for their fellow partners. Loans may become repayable, as well as loss of contacts, goodwill, and experience of the partner in question.
Partnership Insurance will protect the financial security of the partnership by making sure that funds are immediately available to compensate the deceased partners estate for his/her share of the partnership. Although more difficult to quantify, it is also possible to cover the diagnosis of a partner with a specified illness (heart attack, stroke, cancer, etc).
This type of policy is generally accompanied by a “Double Option” or “Buy and Sell Agreement” which sets out the conditions of the transaction between the deceased partner’s estate and the surviving shareholder.
The premiums on this type of Insurance can be paid by the partnership, or by the partners themselves, depending on which type of structure is most suitable. The proceeds of these policies will not be subject to Capital Acquisitions Tax, provided certain conditions are met.
A successful partnership is a great business structure in which to be involved. Having support and diversity of skills gives them the competitive edge over the sole-trader, however the necessity for the correct agreements and understandings from the outset is vital. On the day to day running of the business it may not seem that pressing, but a major event in the partnership could have serious financial consequences. You should ensure if you are in partnership that you have a written agreement that addresses both short and long term goals, that your assets are held in the manner most suitable to your circumstances and that you have appropriate insurance cover to meet any liabilities that would arise on the passing of a partner.